Official Economic Statistics by Tarun Das

Lectures on

Monetary and Financial Statistics

_______________________________________________
_

Professor Tarun Das1

UN Statistical Institute for Asia and Pacific

Chiba, Japan
20-24 August 2007

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Professor Tarun Das teaches Public Policy and Research Methodology to the MBA students at
the Institute for Integrated Learning in Management (IILM), New Delhi. Presently, he is working at
Ulaanbaatar, Mongolia as Glocom Inc. (USA) Expert on Strategic Planning under an ADB Project
on Governance Reforms in the Ministry of Finance, Government of Mongolia. Earlier he worked
as Economic Adviser in the Ministry of Finance and Planning Commission, Government of India.
For any clarification, contact das.tarun@hotmail.com/ das5delhi@yahoo.co.in

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 Official Economic Statistics by Tarun Das

ACKNOWLEDGEMENTS

Professor Tarun Das teaches Public Policy and Research Methodology to the MBA students at
the Institute for Integrated Learning in Management (IILM), New Delhi. Presently, he is working at
Ulaanbaatar, Mongolia as Glocom Inc. (USA) Expert on Strategic Planning under an ADB Project
on Governance Reforms in the Ministry of Finance, Government of Mongolia. Earlier he worked
as Economic Adviser in the Ministry of Finance and Planning Commission, Government of India.

These lectures were prepared by the author at the IILM, New Delhi for the training of the Indian
Statistical Service and Indian Economic Service. The lectures have been modified to some extent
to suit the needs of statistical officers from various countries participating the training program at
the UN Statistical Institute of Statistics for Asia and Pacific (SIAP), Chiba, Japan.

The lectures are broadly based on various IMF publications and manuals on these topics. It is
needless to indicate that these lectures express personal views of the author which may not
necessarily reflect the views of the organisations he is associated with. The author is fully
responsible for any omissions or errors in these lecture notes.

Author would like to express his deepest gratitude to Ms. Davaasuren Chultemjamts, Director,
UNSIAP and Dr. Kulshreshtha, Professor (Statistics), UNSIAP for providing an opportunity to
deliver these lectures to the participants of the Third Group Training Course in Analysis,
Interpretation and Dissemination of Official Economic Statistics during 20-24 August 2007 at
UNSIAP, Chiba, Japan.

Author is also grateful to the Ministry of Finance, Government of Mongolia, particularly to Mr.
Batjargal, Director General, Fiscal Policy and Co-ordination Department for granting necessary
permission to deliver these lectures.

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Contents

1. Brief profile of the resource person

2. Course outline, scope, objectives and pedagogy

3. Monetary and Financial Statistics (MFS) (pages 77-92)

5.1 Basic concepts

5.2 Sectorization and classifications
5.3 Valuation
5.4 Time of recording
5.5 Aggregation, consolidation and netting
5.6 Analytical Framework
5.7 SNA 1993 and the Structure of Accounts
5.8 Relation between macro-economy and financial sectors
5.9 Domestic economy and rest of the world
5.10 Balance Sheets
5.11 Broad Money Supply
5.12 Money Supply- A Case Study for India
5.13 Workout Session on Money Supply and Demand

Selected References

Lecture notes have been prepared mainly on the basis of the following IMF Publications
and Manuals:
Government Finance Statistics (GFS) 1986
Government Finance Statistics Manual (GFSM) 2001
Government Finance Statistics (GFS) Yearbook 2006
Monetary and Financial Statistics Manual (MFSM) 2007
Monetary and Financial Statistics (MFS): Compilation Guide 2007
International Financial Statistics (IFS)
Balance of Payments Manual 2005
Balance of Payments Statistics Yearbook 2006

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Profile of the Resource Person Prof. Tarun Das

• Professor Tarun Das teaches Public Policy and Research Methodology to

the MBA students at the Institute of Integrated Learning in Management
(IILM), 3 Lodhi Institutional Area, New Delhi-110003, India.

• Presently, he is working at Ulaanbaatar, Mongolia as Glocom Inc. (USA)

Expert on Strategic Planning under an ADB Project on Governance
Reforms in the Ministry of Finance, Government of Mongolia. Earlier he
worked as Economic Adviser in the Ministry of Finance and Planning
Commission, Government of India.

• Work Experience: 35 yrs as Development Economist in the government

of India: Last assignments: Economic Advisor, Planning Commission
(1986-1988) and Economic Adviser, Min of finance (1986-2006)

• Country Co-coordinator for the IMF Govt Finance Statistics, Special

Data Dissemination Standards, World Bank Global Development
Finance (1990-2003), the Commonwealth Secretariat Debt Recording
and Management System for India (1998-2003).

• Worked as Consultant to the World Bank (Washington), ADB (Manila),

UNDP (New York), UNESCAP (Bangkok), ILO (Geneva), UNCTAD
(Geneva), UNITAR (Geneva), Global Development Network (GDN)
(Washington), UN Commission for Africa (Addis Ababa).

• Worked on Fiscal Management for the governments of Cambodia,

Indonesia, Lao PDR, Mongolia, Nepal, Philippines and Samoa.

• Member of Govt. Delegate to World Bank, ADB, IMF, UNCSD, WTO.

• Research/Teaching Interest: Macro Econometric Modeling and Policy

Planning, Research Methodology, Public Policy, Economic Reforms,
Poverty, Inequality, Transport Modeling, Public Debt and External Debt.

• Dr. Das is a widely traveled person and possesses diversity in skills in

teaching, training, research, policy planning and modeling. He has
published a number of books and papers on economic statistics, structural
reforms, fiscal policies, management of public debt and external debt,
transport modeling, poverty and inequality, foreign investment, technology
transfer and privatisation strategy.

• Qualifications: MA in Econ. (Gold Medalist), Calcutta University, 1969.

Ph. D. in Econ, as Commonwealth Scholar, East Anglia Univ., England, 1977.

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Course Outline, Scope, Objectives and Pedagogy

Background

The consultant, an expert in the field of Economic, Financial and Government Statistics will cover select
topics in Economic Statistics, namely: Government Finance Statistics (6 sessions), Monetary and Financial
Statistics (4 sessions), BOP/Rest of the World Sector(6 sessions), and Productivity analysis (4 sessions) by
conducting lecture and workshop sessions during 20-24 August 2007. These lectures form part of the wider
Third Group Training Course in Analysis, Interpretation and Dissemination of Official Statistics, 2007 at
U.N. Statistical Institute for Asia and the Pacific, Chiba.

Objectives

The course aims to strengthen the capability of the national statistical services to take part in the process of
improving their economic statistics and quality of analysis, interpretation and dissemination of official
statistics. The consultant is expected to impart training to help participants understand select topics of the
systems of economic accounts, specifically the system of Government Finance Statistics, Monetary and
Financial Statistics, Balance of Payment Statistics, and Productivity analysis for their countries

Learning Outcome
1. Develop a comprehensive understanding of the basic concepts, analytical framework, database,
methodology, uses, applications and limitations of economic statistics.
2. Develop skills and capabilities for analytical presentation, networking and teamwork through
group workout sessions.
3. More emphasis will be laid on understanding basic concepts, methodology, techniques, and their
uses and limitations for various situations, rather than formal proofs and derivation of formula.

Pedagogy

1. Teaching techniques will consist of formal lectures, case studies, practical and workout sessions,
and preparation and presentation of group project reports.
2. Selected case studies would be given so as to facilitate participants to relate to theoretical concepts
with real life situations in economic analysis, policy formulation and planning. The students would
present and discuss these case studies in the class.
3. Participants will be provided with complete course material well in advance. To make classroom
presentations by the resource person more meaningful and effective, participants are required to
come prepared and collect related information and data from journals, newspapers and websites,
and participate actively in classroom sessions.
4. In order to develop teamwork and networking capabilities, students are encouraged to participate
actively in group discussions and workout sessions.

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Monetary and Financial Statistics- Basic Concepts

Professor Tarun Das

1. INTRODUCTION

Monetary statistics consist of a comprehensive set of stock and flow data on the financial and
nonfinancial assets and liabilities of an economy’s financial corporations sector. Financial
statistics consist of a comprehensive set of stock and flow data on the financial assets and
liabilities of all sectors of an economy. The financial statistics are generally organized and
presented in formats designed to show financial flows among the sectors of an economy and
corresponding financial asset and liability positions.

Concepts described here are identical to those in the 1993 SNA and the fifth edition of the
Balance of Payments Manual (BPM5). Economic territory may not be identical with boundaries
recognized for political purposes. A country’s economic territory consists of a geographic
territory administered by a government; within this geographic territory, persons, goods, and
capital circulate freely.

An institutional unit has a center of economic interest and is a resident of a country when, from
some location (dwelling, place of production, or other premises) within the economic territory of
the country, the unit engages and intends to continue engaging (indefinitely or for a finite period)
in economic activities and transactions on a significant scale. Entities that do not satisfy the above
requirements are referred to as nonresidents.

SECTORIZATION

In defining monetary and credit aggregates it is necessary to identify the money (credit) issuing
and holding sectors. Sectorization is also crucial to constructing the financial statistics and, in
particular, the flow of funds which deal with intersectoral financial stocks and flows. Institutional
units differ with respect to their economic objectives, functions, and behavior and are grouped
into sectors that include units with similar characteristics. The resident units of the economy are
grouped into the following mutually exclusive institutional sectors:

1) Financial corporations.
2) General government.
3) Nonfinancial corporations
4) Households.
5) Nonprofit institutions serving households (NPISH).

For monetary and financial statistics, the IMF manual divides the nonfinancial corporations sector
into only two subsectors—public nonfinancial corporations and other nonfinancial corporations.
Thus, unlike the 1993 SNA, the revived IMF Manual does not divide nonfinancial corporations
into separate subsectors based on the residency of the units that own and control them.

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The 1993 SNA makes extensive use of separate data categories for the household and nonprofit
institutions serving households (NPISH) sectors but, in some instances, combines these sectors
into a single sector referred to as other resident sectors.

Financial corporations sector

Box-1 Main Sectors and Subsectors

Financial corporations
Central bank
Other depository corporations
Other financial corporations
Insurance corporations and pension funds
Other financial intermediaries, except insurance corporations and pension funds
Financial auxiliaries
Nonfinancial corporations
Public nonfinancial corporations
Other nonfinancial corporations
General government
Central government
State government
Local government
Social security funds*
Households
Nonprofit institutions serving households
*Alternatively, social security funds can be allocated to the other subsectors of general government on the
basis of the level at which they are organized.

The financial corporations sector contains five subsectors:

(1) The central bank;

(2) Other depository corporations
(3) Other financial intermediaries, except insurance corporations and pension funds;
(4) Insurance corporations and pension funds; and
(5) Financial auxiliaries.

The central bank subsector includes the following:

1) Central banks, which in most countries are separately identifiable institutions that, across
countries, are subject to varying degrees of government control, engage in differing sets
of activities, and are designated by various names (e.g., central bank, reserve bank,
national bank, or state bank).
2) Currency boards or independent currency authorities that issue national currency that is
fully backed by foreign exchange reserves.
3) Government-affiliated agencies that are separate institutional units and primarily perform
central bank activities.

Other Depository Corporations

The other depository corporations subsector consists of all resident financial corporations
(except the central bank) and quasi-corporations that are mainly engaged in financial
intermediation and that issue liabilities included in the national definition of broad money.

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Examples of the designations given to institutional units in the other depository corporations
subsector are:

1) commercial banks,
2) merchant banks,
3) savings banks, savings and loan associations,
4) building societies, and mortgage banks,
5) credit unions and credit cooperatives,
6) rural and agricultural banks,
7) offshore banks and
8) Travelers’ check companies that mainly engaged in financial corporation activities.

Other Financial Intermediaries

The subsector of other financial intermediaries covers a diverse group of units constituting all
financial corporations other than depository corporations, insurance corporations, pension
funds, and financial auxiliaries. Units in the other financial intermediaries subsector generally
raise funds by accepting long-term or specialized types of deposits and by issuing securities and
equity. These intermediaries often specialize in lending to particular types of borrowers and in
using specialized financial arrangements such as financial leasing, securitized lending and
financial derivative operations. A few examples are as follows:

•Finance companies are institutional units primarily engaged in the extension of credit to
nonfinancial corporations and households.

•Financial leasing companies engage in financing the purchase of tangible assets. The leasing
company is the legal owner of the goods, but ownership is effectively conveyed to the lessee,
who incurs all benefits, costs, and risks associated with ownership of the assets.

•Investment pools are institutional units that are organized financial arrangements, excluding
pension funds that consolidate investor funds for the purpose of acquiring financial assets.
Examples are mutual funds, investment trusts, unit trusts, and other collective investment units.

Securities underwriters and dealers include individuals or firms that specialize in security market
transactions by (1) assisting firms in issuing new securities through the underwriting and market
placement of new security issues and (2) trading in new or outstanding securities.

• Vehicle companies are financial entities created to be holders of securitized assets or assets that
are removed from the balance sheets of corporations or government units as part of the
restructuring of these units.

•Financial derivative intermediaries consist of units that engage primarily in issuing or taking
positions in financial derivatives recognized as financial assets.

• Specialized financial intermediaries include holding corporations, companies that provide

short-term financing for corporate mergers and takeovers, export/import finance firms, factors or
factoring companies, venture capital and development capital firms, and pawnshops that
predominantly engage in lending rather than retailing.

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Financial Auxiliaries

The financial auxiliaries subsector includes financial corporations that engage in activities closely
related to financial intermediation but do not act as intermediaries. The most common
designations for financial corporations classified as financial auxiliaries are as follows:

• Public exchanges and securities markets

• Brokers and agents
• Foreign exchange companies
• Financial guarantee corporations
• Other financial auxiliaries comprise all other auxiliaries not classified elsewhere.

CLASSIFICATION
The assets and liabilities of the financial corporations sector are classified in the following broad
categories:

1) Monetary gold and SDRs.

2) Currency and deposits.
3) Securities other than shares.
4) Loans.
5) Shares and other equity.
6) Insurance technical reserves.
7) Financial derivatives.
8) Other accounts receivable/payable.
9) Nonfinancial assets.

The secondary level of classification disaggregates currency and deposits into separate categories
for currency, transferable deposits, and other deposits; it also disaggregates insurance technical
reserves and other accounts payable. Shares and other equity on the liability side of the balance
sheets of financial corporations are disaggregated into the following categories;

(1) Funds contributed by owners;

(2) Retained earnings;
(3) General and special reserves;
(4) SDR allocations (applicable to the central bank); and
(5) Valuation adjustments.

Data for these categories are necessary for a detailed analysis of the shares and other equity of
financial corporations in the context of the monetary statistics.

VALUATION
Market price is used as the primary concept of valuation of transactions, other financial flows,
and stocks (i.e., balance sheet amounts). It recognizes that market price quotations are not
available for financial assets not traded in secondary markets or traded on an infrequent basis.
Therefore, it is necessary to estimate market-equivalent values for such financial assets. This
manual refers to estimates of market-equivalent values as fair values.

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The appropriate exchange rate is used for conversion from a transaction currency into the national
currency is the market exchange rate prevailing on the transaction date. For conversion of stocks
of foreign-currency-denominated assets and liabilities, the market exchange rate prevailing on the
balance sheet date should be used. The midpoint between the buying and selling rates should be
used in converting both flow and stock data.

TIME OF RECORDING

IMF manual (like the 1993 SNA) recommends recording transactions on an accrual, rather than
cash, basis. Thus, the recording should coincide with the change in ownership of the asset rather
than with the time of payment.

AGGREGATION, CONSOLIDATION, AND NETTING

Aggregation refers to the summing of stock and flow data across all institutional units within a
sector or subsector, or of all assets or liabilities within a particular category. IMF manual
recommends reporting and organizing of the underlying data for the monetary and financial
statistics on an aggregated basis.

Consolidation refers to the elimination of stocks and flows that occur between institutional units
that are grouped together. For analytical purposes, the reported data are consolidated to obtain the
surveys of the financial corporations sector and its subsectors.

2. Analytical Framework

For compiling the monetary and financial statistics, the financial corporations sector is divided
into the central bank subsector (CBS), the other depository corporations subsector (ODCS), and
the other financial corporations subsector (OFCS). Taken together, the central bank and other
depository corporations constitute the depository corporations subsector (DCS).

Broad-money liabilities (BML) equal the sum of net foreign assets (NFA), domestic credit (DC),
and other items (net) (OIN). The opening or closing stock positions in the DCS can be shown as:

BML = NFA + DC – OIN

DC comprises net claims on central government and claims on other sectors.

DC = NCG + CORS

Where NCG = net claims on central government

CORS = claims on other sectors

OIN denotes a residual category for other liabilities less other assets, when other liabilities
include all liabilities not included in broad money. Total flows (closing stocks less opening
stocks) are shown as:

∆ BML = ∆ NFA + ∆ DC – ∆ OIN, where ∆ stands for a total flow (period-to-period change).

Financial assets and liabilities are classified by instrument and by creditor/debtor sector as shown
in Table-1. Supplementary data as shown in Table-2 are also collected and disseminated.

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Table-1 Broad Classifications of Assets and Liabilities

Assets
Deposits
Other deposits by maturity (short- and long-term or
other maturity breakdown)
Deposits with nonresidents by country of issuance
Securities other than shares
By maturity (short- and long-term or other maturity
breakdown)
By type (certificates of deposit, commercial paper,
bankers’ acceptances, bills, bonds, etc.)
Securities under repurchase agreement
Nonresident securities by debtor country
Liabilities
Deposits
Other deposits by maturity (short- and long-term or
other maturity breakdown)
Deposits with nonresidents by country of issuance
Securities other than shares
By maturity (short- and long-term or other maturity
breakdown)
By type (certificates of deposit, commercial paper,
bankers’ acceptances, bills, bonds, etc.)
Securities under repurchase agreement
Nonresident securities by debtor country

Loans
By maturity (short- and long-term or other maturity
breakdown)
Loans arising from repurchase agreements, by
debtor sector/subsector
Nonresident loans by (1) debtor country and (2)
type of debtor (IMF, other international
organization,
Central bank, foreign government, etc.)
Financial derivatives
By major category (i.e., futures contract, other
forward contract, or options contract) and
subcaterogy.
Loans
By maturity (short- and long-term or other maturity
breakdown)
Loans arising from repurchase agreements, by
debtor sector/subsector
Nonresident loans by (1) debtor country and (2) type
of debtor (IMF, other international organization,
Central bank, foreign government, etc.)
Financial derivatives
By major category (i.e., futures contract, other
forward contract, or options contract) and
subcaterogy.

Table-2 Supplementary Data on Financial Sector

Assets Liabilities Contingent Items

Financial derivatives: Notional Financial derivatives: Guarantees by category of

values Notional values guaranteed
By category of underlying asset By category of underlying Obligation (deposits, loans,
(deposits, asset (deposits, securities, etc.)
loans, securities, etc.) loans, securities, etc.) Commitments by category
By risk type (interest rate risk, By risk type (interest rate (credit line,
exchange risk, exchange Loan commitment,
rate risk, etc.) rate risk, etc.) underwriting contract, etc.)

3. THE ACCOUNTS OF THE 1993 SNA: THE STRUCTURE OF THE ACCOUNTS

The 1993 SNA contains a consistent and integrated set of economic accounts that cover all
institutional sectors and subsectors of the economy and the economic relationships of an economy
with the rest of the world (ROW). This comprehensive accounting framework is designed for a
broad range of analyses covering production, generation, and distribution of income, uses of
income, capital formation, and financial activities. The SNA contains a full set of interrelated
accounts for transactions and other flows, as well as balance sheets that show the stocks of
nonfinancial assets, financial assets, and liabilities.

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The accounts constitute two interconnected closed sets of accounts, as indicated in Box 8.1. The
first set is the sequence of accounts that records economic flows arising from transactions, while
the second set represents the balance sheets and the accumulation accounts. These two sets are
interconnected through the capital and financial accounts that are common to both.

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The current accounts, shown in Box 8.2, comprise the production account, the distribution of
income account, and the use of income account. These are described below:

• Production account. Value added and GDP represent the income or economic value created
through the production process, that is, by converting intermediate consumption into output of
goods and services (equation 1).

• Primary distribution of income account. These accounts show how the value generated through
production is distributed to labor and capital and to government in the form of wages and salaries,
operating surplus/mixed incomes, and taxes on production (equation 2). They also show how
these primary incomes are distributed to residents and the ROW (equation 3). GNI measures the
total primary income accruing to residents. It is defined as the sum of GDP, net compensation of
employees receivable from abroad and net property income receivable from abroad.

• Secondary distribution of income account. GNDI measures the income that can be used for
final consumption or saving and is the sum of GNI and net current transfers from abroad
(equation 4).

• Use of income account. The use of income account measures gross saving as the balance
remaining after the deduction of final consumption expenditure from GNDI, and net saving as
gross saving minus consumption of fixed capital (equation 5).

The accumulation accounts consist of the capital account, the financial account, and the other
changes in assets account. The other changes in assets account comprise two sub accounts—the
revaluation account and the OCVA account.

• Capital account. This account records acquisitions and disposals of nonfinancial assets (own
account capital formation, changes in inventories, and consumption of fixed capital), and
measures the changes in net worth as a result of saving and capital transfers receivable from
abroad. The balancing item is net lending or net borrowing, depending on whether saving plus
capital transfers is less than the net acquisition of nonfinancial assets (equation 6).

• Financial account. This account records the acquisition and disposal of financial assets and
abilities, and shows how net lending or net borrowing from the capital account is reflected in
transactions in these financial items (equation 7). The financial account is the last account in the
sequence of accounts recording transactions.

• Revaluation account. This account (equation 8) shows changes in net worth arising from
holding gains and losses on nonfinancial assets, financial assets, and liabilities resulting from
changes in the prices of the various assets and liabilities.

• OCVA account. This account (equation 9) shows changes in net worth arising from all factors
other than transactions as recorded in the capital and financial accounts and holding gains/losses
as recorded in the revaluation account.

The balance sheets show stocks of nonfinancial and financial assets and liabilities on the date for
which the balance sheet is compiled.

The goods and services account shows how total supply of goods and services (products) from
domestic production and imports is used for intermediate and final use (equation 11a).

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In Box 8.3, equations 1 through 6 show the key macroeconomic relationships among saving,
capital formation, and the ROW, stated in terms of SNA components and balancing items.
Equation 1 restates the expenditure approach to calculating GDP. Equation 2 shows the external
current account balance.. Equation 3a defines GNDI. Equation 3b expands the terms of 3a; 3c
simplifies this equation to identify the external current account balance. Equation 4 rearranges the
elements of equation 3c to show that saving, as derived in the use of income account, is equal to
the sum of investment and the external account balance. Equation 5 shows the equality between
the saving-capital formation gap and the external current account balance. Equation 6a is a
statement of the capital account for the total economy, and 6b relates the capital account to the
external current account balance in calculating net lending/net borrowing to the rest of the world.

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4. Balance Sheets
A balance sheet is a statement, drawn up at a particular point in time, of the value of the stocks of
nonfinancial assets and financial assets and liabilities of a subsector, a sector, or the entire
economy. The balancing item in the balance sheet—the total value of assets less total liabilities—
is net worth. The net worth of the economy, often referred to as national wealth, equals the sum
of a country's nonfinancial assets and its net financial claims on the rest of the world.

The broad components of balance sheet data are as follows:

• Nonfinancial assets—Entities over which ownership rights are enforced by institutional units,
and from which economic benefits may be derived by their owners by holding them, or using
them over a period of time. Nonfinancial assets consist of tangible assets, both produced and
nonproduced, and intangible assets for which no corresponding liabilities are recorded.

• Financial assets—Entities over which ownership rights are enforced by institutional units and
from which economic benefits may be derived in the form of holding gains or property income.
Financial assets differ from other assets in the SNA in that, other than for monetary gold and
SDRs, there is a counterpart liability of another institutional unit.

• Financial liabilities—Financial obligations of institutional units that are the counterparts to

financial assets of other units.

• Net worth—The balancing item in the balance sheet, equal to the value of all assets less the
value of all liabilities.

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The Capital Account

The capital account records (1) the value of nonfinancial assets acquired less nonfinancial assets
disposed of during the year and (2) capital transfers receivable less capital transfers payable.

• Saving is the final balancing item of the current accounts—the part of disposable income that is
not spent on final consumption of goods and services and therefore is available for acquisition of
nonfinancial or financial assets or repayment of liabilities.

• Current external balance represents the balance with the rest of the world on exports and
imports of goods and services, net primary income from abroad, and net current transfers from
abroad. The current external balance is equal in magnitude, but opposite in sign, to the domestic
economy’s net lending/net borrowing, and thus equal to the difference between an economy’s
saving plus net capital transfers and capital formation.

• Gross fixed capital formation includes acquisitions less disposals of new and existing fixed
assets. Fixed assets are tangible and intangible assets created as outputs of production processes
that are themselves used repeatedly in production for periods of more than a year. Consumption
of fixed capital during the accounting period is shown as a separate item.

• Consumption of fixed capital reflects the decline in the value of the stock of fixed assets used
in production as a result of physical deterioration, normal obsolescence, and normal accidental
damage. It excludes the value of fixed assets destroyed by war or natural disasters. Gross fixed
capital formation less consumption of fixed capital equals net fixed capital formation.

• Change in inventories comprises the value of the inventories acquired by an enterprise less the
value of the inventories disposed of during an accounting period.

• Acquisitions less disposals of valuables refers to net transactions in goods (artwork, antiques,
old coins etc.) that are held as stores of value over time or to realize holding gains.

• Acquisitions less disposals of nonproduced nonfinancial assets refers to acquisitions less

disposals of land, other nonproduced tangible assets (e.g., subsoil assets), and intangible
nonproduced assets (e.g., patented entities, leases, and purchased goodwill).

• Capital transfers receivable/payable are unrequited transactions, which may be in kind or in

cash. Capital transfers in kind arise when ownership of an asset other than inventories and cash is
transferred from one unit to another or liabilities are canceled by a creditor (debt forgiveness).
Both capital transfer receivables and payables are recorded on the right side of the account
because they directly affect net worth. A capital transfer receivable increases net worth, while a
capital transfer payable reduces net worth.

Net lending/Net borrowing is the balancing item of the capital account, calculated as net saving
plus capital transfers receivable less capital transfers payable less acquisition less disposals of
nonproduced nonfinancial assets. The net resources available to an economy or sector from
saving and net capital transfers that are not used for capital accumulation are the amount of
resources available for net acquisition of financial assets, that is, net lending. Economies or
institutional sectors with a surplus of resources (through saving and net capital transfers) over
capital accumulation are net lenders. Economies or institutional sectors that have capital
expenditures in excess of these resources are net borrowers.

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Box 8.4. The Balance Sheets and Accumulation Accounts

Opening Balance Sheet

The stock of nonfinancial assets and financial assets and liabilities of an economy, sector, or
institutional unit at the beginning of an accounting period.
The balancing item is opening net worth, calculated as total assets less total liabilities.
Capital Account

During an accounting period, the capital account records (1) the value of nonfinancial assets
acquired less nonfinancial assets disposed of and (2) capital transfers receivable less capital
transfers payable. Changes in the value of nonfinancial assets resulting from revaluation and
changes in the volume of nonfinancial assets not resulting from transactions are not recorded in
the capital account.
Net saving carried forward from the current accounts and net capital transfers measure the
resources available for capital and financial accumulation, a total that is equal to changes in net
worth as a result of saving and capital transfers. The balancing item for the account is net
lending or borrowing, which is equal to savings and capital transfers less net capital formation.
Financial Account

The financial account records transactions during an accounting period that involve financial
assets and liabilities. Changes in the value of financial assets and liabilities resulting from
revaluation, and changes in the volume of financial assets and liabilities not resulting from
transactions, are not recorded in the financial account.
Net lending or borrowing, carried forward from the capital account, is equal to net acquisition of
financial assets less net incurrence of liabilities.
Revaluation Account

The revaluation account records the holding gains or losses resulting from changes in market
prices (including exchange rates) that accrue during the accounting period to owners of
nonfinancial assets and financial assets and liabilities
The balance of holding gains/losses is changes in net worth resulting from holding gains/losses.
OCVA (Other changes in the volume of assets account)

Changes in nonfinancial assets and financial assets and liabilities during an accounting period that
are not due to transactions or revaluations.
The balance of the OCVA account (changes in assets less changes in liabilities) equals changes in
net worth resulting from other changes in volume of assets.
Closing Balance Sheet

The stock of nonfinancial assets and financial assets and liabilities of an economy, institutional
sector, or institutional unit at the end of an accounting period. The stock of assets in the closing
balance sheet equals the stock in the beginning balance sheet plus the flow changes shown in the
capital, financial, revaluation, and OCVA accounts.

The balancing item is closing net worth.

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 Official Economic Statistics by Tarun Das

5. Broad Money Supply

Money has four basic functions, serving as a

(a) medium of exchange—the means for acquiring goods, services, and financial and
nonfinancial assets without resorting to barter;
(b) store of value—a means of holding wealth;
(c) unit of account—a standard for denominating the prices of goods and services and
the values of financial and nonfinancial assets, thereby providing a means for
comparisons of values and for preparation of financial accounts; and
(d) standard of deferred payment—a means of relating current and future values in
financial contracts.

Box -1. Broad Money and Its Holders and Issuers: Representative Sectors and Liabilities

Broad-money holders
Central government (inclusion usually pertains only to national currency holdings)
Other financial corporations
State and local government
Public nonfinancial corporations
Other nonfinancial corporations
Other resident sectors
Nonresidents (inclusion usually pertains only to national currency holdings)

Broad-money liabilities

Issued by depository corporations

National currency
Transferable deposits
Demand deposits (transferable by check, giro order, or similar means)
Bank checks (if used as a medium of exchange)
Traveler’s checks (if used for transactions with residents)
Deposits otherwise commonly used to make payments
Other deposits
Nontransferable savings deposits
Term deposits (i.e., time, or fixed, deposits)
Securities other than shares
Certificates of deposit
Commercial paper
Others

Issued by other sectors

National currency issued by central government
Foreign currency (applies to countries in which foreign currency circulates as a medium of exchange)
Transferable deposits
Transferable deposits accepted by central government or the postal system
Traveler’s checks issued by units other than depository corporations
Other deposits accepted by central government or the postal system

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 Official Economic Statistics by Tarun Das

Currency and transferable deposits : Currency and transferable deposits comprise the
most liquid financial assets, and all countries include them in their broad-money
aggregates. They have the following characteristics:
· Legal tender or general acceptability.
· Fixed nominal (face) value.
· Easy Transferability.
· No Transaction costs.
· Divisibility.
· Maturity..
· No or marginal Yield.

6. Money Supply- A Case Study for India

Table-1: Measures of Monetary and Liquidity Aggregates in India

Reserve Money (M0) = Currency in circulation + Bankers’ deposits with the RBI + ‘Other’ deposits
with the RBI
(M )
0 = Net RBI credit to the Government + RBI credit to the commercial sector +
RBI’s claims on banks + RBI’s net foreign assets + Government’s currency
liabilities to the public – RBI’s net non-monetary liabilities
M
1= Currency with the public + Demand deposits with the banking system +
‘Other’ deposits with the RBI.
M
2= M1 + Savings deposits of post office savings banks
M M
3= 1 + Time deposits with the banking system
M
3= Net bank credit to the Government + Bank credit to the commercial sector +
Net foreign assets of the banking sector + Government’s currency liabilities
to the public – Net non-monetary liabilities of the banking sector
M
4= M3 + All deposits with post office savings banks (excluding National Savings
Certificates).
NM
1= Currency with the public + Demand deposits with the banking system +
‘Other’ deposits with the RBI.
NM
2= NM1 + Short-term time deposits of residents (including and up to the
contractual maturity of one year
NM NM
3= 2 + Long-term time deposits of residents + call/ term funding from
financial institutions
L1 = NM3 + All deposits with the post office savings banks (excluding National
Savings Certificates).
L2 = L1 +Term deposits with term lending institutions and refinancing institutions
(FIs) + Term borrowing by FIs + Certificates of deposit issued by FIs.
L3 = L2 + Public deposits of non-banking financial companies.
Net bank credit to Net RBI credit to the Government (i.e., Net RBI credit to the Centre + Net
Government = RBI credit to the State Governments) + Other banks’ credit to the
Government
Bank credit to the RBI credit to the commercial sector + Other banks’ credit to the commercial
commercial sector = sector
Net foreign assets of RBI’s net foreign assets + Other banks’ foreign assets
The banking sector =
Net non-monetary RBI’s net non-monetary liabilities + Net non-monetary liabilities of other
liabilities of the banks.
banking sector =

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 Official Economic Statistics by Tarun Das

TABLE-2: RESERVE BANK OF INDIA BALANCE SHEET : ISSUE DEPARTMENT

(Rupees Crore)
Item 1995 2000 2005
LIABILITIES
1 Notes held in the Banking Department
14 15.3 13
2 Notes in circulation 110882 201486 378468
Total Notes issued 110896 201501 378481
ASSETS
1 Gold Coin and Bullion
(a) Held in India 11680.6 10761.3 15828.4
(b) Held outside India 1.5 0 0
2 Foreign Securities 10200 86700 361033
3 Total (1+2) 21882.2 97461.3 376862
4 Rupee Coin 45.9 115.3 101.9
5 Government of India Rupee Securities
88967.6 103925 1517.2
Total Assets 110896 201501 378481

TABLE-3: SELECT MONETARY RATIOS FOR INDIA

Year Major monetary ratios Income velocity*

CP/DD BR/DD CP/AD BR/AD M1 M3 GDP/ GDP/ GDP/

/RM /RM M3 M1 CP

1 2 3 4 5 6 7 8 9 10
1951-52 2.28 0.19 1.45 0.12 1.32 1.55 4.81 5.64 8.21
1960-61 2.61 0.21 1.01 0.08 1.28 1.83 4.4 6.3 8.78
1970-71 1.53 0.14 0.68 0.06 1.51 2.26 4.42 6.62 11.02
1980-81 1.49 0.56 0.32 0.12 1.21 2.95 2.82 6.88 11.63
1990-91 1.37 0.81 0.25 0.15 1.09 3.11 2.28 6.52 11.43
2000-01 1.33 0.51 0.2 0.08 1.26 4.33 1.72 5.91 10.46
2004-05 1.3 0.4 0.19 0.06 1.35 4.79 1.47 5.2 9.28
CP: Currency with the public.
DD: Demand deposits with banks.
BR: Bank reserves (balances with RBI plus cash with banks).
AD: Aggregate deposits.
RM: Reserve money.
M
1: Narrow money.
M
3: Broad money.
GDP: Gross Domestic Product at current market prices.
Source: RBI.

* Irving Fisher's equation of exchange P•T = M•V, where T stands for Transactions of
goods and services, P average price, M money supply and V velocity of money. This
relates the value of national output to the money supply and velocity of money. It is also
called Quantity Theory of Money Given values of the other terms in the equation viz. PQ
= GDP and M=Money Supply, velocity V can be calculated.

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Workout Session on Money Supply

Table-4: Money Stock in India: Components and Sources
(Rupees Crore)

Outstanding as on

Items End-June End-June End-June

2005 2006 2007
1 2 3 4
1 Currency with the Public 375363 436916 501223
2 Demand deposits with banks 299410 363989 431929
3 Time deposits with banks 1680886 1978796 2447949
4 "Other" deposits with RBI 4457 5255 7815
5 Net Reserve Bank credit to the Government -8700 8189 -19731
6 Other banks’ credit to the Government 774805 781837 876884
7 Reserve Bank credit to commercial sector 1390 1387 1386
8 Other banks’ credit to the commercial sector 1340104 1706547 2096913
9 Net foreign exchange assets of banking sector 635877 784281 910435
10 Government's currency liabilities to the public
7831 7833 8457
11 Banking sector's net non-monetary liabilities
other than time deposits 391193 505119 485428
12 of which : Net non-monetary liabilities of RBI 108819 178377 133451
13 GDP at current market prices
3529200 3991300 4486800

Given the above data, estimate the following for the Indian economy:

(a) Narrow money supply (M1) and broad money supply (M3) during July 2005-
June 2006 and July 2006-June 2007.
(b) Cross-check M3 from both supply and demand side.
(c) Yearly growth rates of M1 and M3 and their components during July 2005-
June 2006 and July 2006-June 2007, and comment on variations of the
growth rates.
(d) Income velocity of money during July 2005-June 2006 and July 2006-June
2007.

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 Official Economic Statistics by Tarun Das

Workout Session-1 on Money Supply

Given data in Table-1 below, estimate the following for the Indian economy:
(a) Narrow money supply (M1) and broad money supply (M3) during July 2005-June 2006
and July 2006-June 2007.
(b) Cross-check M3 from both supply and demand side.
(c) Yearly growth rates of M1 and M3 and their components during July 2005-June 2006
and July 2006-June 2007, and comment on variations of growth rates.A7
(d) Income velocity of money during July 2005-June 2006 and July 2006-June 2007.

Table-1: Money Stock in India: Components

and Sources
(Rupees Crore)
Stocks Outstanding as on

Items End-June End-June End-June

2005 2006 2007
1 2 3 4
1 Currency with the Public 375363 436916 501223
2 Demand deposits with banks 299410 363989 431929
4 "Other" deposits with RBI 4457 5255 7815
M1 1+2+4 679230 806160 940967
3 Time deposits with banks 1680886 1978796 2447949
M3 S M1 + 3 2360116 2784956 3388916
M3 D 5 + 6+7+8+9+10-11 2360116 2784956 3388916
5 Net Reserve Bank credit to the Government -8700 8189 -19731
6 Other banks’ credit to the Government 774805 781837 876884
7 Reserve Bank credit to commercial sector 1391 1388 1386
8 Other banks’ credit to the commercial sector 1340105 1706547 2096913
9 Net foreign exchange assets of banking sector 635877 784281 910435
10 Government's currency liabilities to the public 7831 7833 8457
11 Banking sector's net non-monetary liabilities other 391193 505119 485428
than time deposits
12 of which : Net non-monetary liabilities of RBI 108819 178377 133451
13 GDP at current market prices 3567177 4128895 4712198

Income Velocity
GDP/ Currency 9.5 9.5 9.4
GDP/ M1 5.3 5.1 5.0
GDP/ M3 1.5 1.5 1.4

Flows

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 Official Economic Statistics by Tarun Das

1 Currency with the Public 61553 64307

2 Demand deposits with banks 64579 67940
4 "Other" deposits with RBI 798 2560
M1 1+2+4 126930 134807
3 Time deposits with banks 297910 469153
M3 S M1 + 3 424840 603960
M3 D 5 + 6+7+8+9+10-11 424840 603960
5 Net Reserve Bank credit to the Government 16889 -27920
6 Other banks’ credit to the Government 7032 95047
7 Reserve Bank credit to commercial sector -3 -2
8 Other banks’ credit to the commercial sector 366442 390366
9 Net foreign exchange assets of banking sector 148404 126154
10 Government's currency liabilities to the public 2 624
11 Banking sector's net non-monetary liabilities other than time deposits 113926 -19691

12 of which : Net non-monetary liabilities of RBI 69558 -44926

13 GDP at current market prices 3567177 4128895 4712198

Flows
1 Currency with the Public 16.4 14.7
2 Demand deposits with banks 21.6 18.7
4 "Other" deposits with RBI 17.9 48.7
M1 1+2+4 18.7 16.7
3 Time deposits with banks 17.7 23.7
M3 S M1 + 3 18.0 21.7
M3 D 5 + 6+7+8+9+10-11 18.0 21.7
5 Net Reserve Bank credit to the Government -194.1 -340.9
6 Other banks’ credit to the Government 0.9 12.2
7 Reserve Bank credit to commercial sector -0.2 -0.1
8 Other banks’ credit to the commercial sector 27.3 22.9
9 Net foreign exchange assets of banking sector 23.3 16.1
10 Government's currency liabilities to the public 0.0 8.0
11 Banking sector's net non-monetary liabilities other than time deposits 29.1 -3.9

12 of which : Net non-monetary liabilities of RBI 63.9 -25.2

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Official Economic Statistics by Tarun Das

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